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Sunday, December 29, 2013

Recent Events in International Finance and Visual Effects

This is part two of a series on recent events in the area of international finance and government subsidies that affect the business of visual effects. This process has been going on for at least 15 years and it has severely affected the existence and survival of visual effects companies. The events that I describe here, some of them a continuation of older policies and some of them new initiatives, will have a structural impact on the visual effects industry in the world for years to come.

It is probably helpful to recall that it is only since the early 1980's that visual effects has been significant enough to attract government attention. It was Star Wars (1978) that started the process, but it was sometime in the mid-1980's that the scale of the industry started to increase. It was the tsunami of shit that came from the digital take-over of visual effects in the early 1990's that increased the scope of visual effects and trendiness thereof such that this industry was seen as a likely subject of tax exemptions and subsidies to increase and control employment within a national film community. Keep in mind, that at various times over the last 15 years, there have been thousands of people paid roughly $100K / year working in this industry. Perhaps as many as 5-7 thousand people, although this number is not formally known to the best of my knowledge, and it includes to some extent the people who were working in "feature length computer animation" as distinct from visual effects. Thus, the real numbers are probably not as high as suggested here, but are very substantial. We are talking about 1000's of people in the Los Angeles and San Francisco area who have lost their jobs as a result of these subsidies.

So keep in mind as you read about these events that the story did not begin this year, but that all of these events probably have a background and history that I know nothing, or very little, about. Also, we are relying on the popular press to describe these events and so we can be sure that the information is at best incomplete, if not entirely misleading.

All of these events described below have had or will have a very negative impact on the existence and future of visual effects in this country. However, every silver lining has a cloud and in another post in this series, I will go over some of the reasons that these subsidies and tax allowances can be seen in a positive light, as long as you have no intention of working in the field in America or to make a living here. Only a very few people in this country should be expected to work unless they are a visual effects supervisor, if then.

1. The European Union extends rules on subsidies

The European Union has decided to
extend and expand their rules on subsidizing domestic film
production. Now up to 50% of a film may be financed by that
government. Governments may require that 50 to 80 percent of the
subsidized amount be spent within the country. A few months ago,
France threatened to boycott talks between the US and the EU until
this sector was exempted from the negotiations. In other words, they
will not permit discussions with the United States in this area. How
that boycott fits in with other international trade agreements on
economic subsidies will require more investigation.

The UK Government has
agreed to change the rules to make it easier for American producers
to receive tax credit for work done in the UK. I don't believe
these are new subsidies per se, but I think it addresses the issues
whereby certain producers were not qualifying for the credits even
though they were doing some of the work in the UK. The article in
the Guardian seems to think that it is primarily the visual effects
sector that will benefit. The amount of rebate seems to be about 25% reduction in taxes for eligible projects, so the kind of numbers we are talking about here are significant. See

3. Jim Cameron receives large
New Zealand subsidy for 'Avatar 2 and 3', will do all visual effects
work in New Zealand

The Avatar films are huge and would
normally be broken up among many facilities. But now that New
Zealand has put in a large chunk of cash, both films in their
entirety will have their effects done at WETA in New Zealand, at
least as large a project as Lord of The Rings was for them.

To these events we need to recall that (a) the ongoing Canadian rebates for work done in their country, up to 40% of the amount spent, (b) Other countries such as India and China have made substantial efforts in this area although not formal subsidies to the best of my knowledge (India has very liberal "intern" laws that allows entire crews to be hired and not paid in order to "get the experience"), China has set up a 2,500 person 3D studio in Beijing in order to educate their own workers), (c) special subsidies by the New Zealand government to the Peter Jackson projects, all of which are major visual effects projects done at WETA in New Zealand.

From the point of view of a film producer, this is all good. Talking some innocent investor out of their money to help finance a film, especially when they get nothing in return (e.g. no points in the film), is part of the Producer's job. If New Zealand wants to give Mr. Cameron 500 million dollars over 6 years (or whatever the amount will be) why not ?

These events, which all represent long term structural changes to the "free market", means that in the fiercely competitive visual effects industry, any company that lacks one or more of these advantages will not be able to compete. Which is exactly what we see today. Asylum, Rhythm and Hues, VIFX/Video Image, The Orphanage, most of Sony Imageworks not to mention many other smaller companies have gone away. Others, such as Digital Domain and Tippet, are clearly marginal.

ILM is a bit of a mystery to me. They seem to be hanging in there, and of course they have the new Star Wars films from their parent company, Disney.

Here are some conclusions and questions:

1. The collapse of visual effects in this country is a result of structural changes in the international community which are beyond the ability of any company to deal with.

2. This collapse has resulted in the unemployment of thousands of people on the West Coast, some of whom have moved to other industries, some have gotten jobs overseas if they could.

3. You should expect this process to continue with more visual effects companies in this country going out of business or moving overseas.

4. Any discussion of unemployment or the "business model being broken" that does not take into account the primary cause of government subsidies and tax exemptions is worthless.

5. Globalization is just Mercantilism by another name. Our government could do something about this if they cared, but they do not care.

For those of you who believe that there is nothing our country could do to change this situation, please take the time to read any economic history of the last few hundred of years. There are many things that countries can do in these circumstances, if they care to.

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1. In the early days of computer animation, many of us were not aware that "computer animation" and "visual effects" were completely different industries. To us it looked nearly the same thing with a tremendous overlap of technologies and skills. Well, yes and no, but mostly no. I will write a post on the issues here at some point. They are not subtle and its an example of how naive some of us were.

4 comments:

Hi Michael, Why do you say that globalization is mercantilism by another name? Are you talking just about the visual effects/animation industry? It seems indisputable to me that most globalization is just the result of labor and other production costs being much lower in other parts of the world.

Dear Anonymous, Its a very good question you have asked. Is Globalization new? Does globalization imply the free market? What about when there is vast government intervention to enhance so called globalization at the expense of some people, is that also globalization? How does that differ from Mercantilism. Whatever we are talking about here, it is not just in the area of visual effects and animation, although this may be a very egregious case. Governments manipulate this situation whenever it is to their perceived advantage. China maintains an unrealistic exchange rate that makes it more cost effective to manufacture in China. We maintain a low cost system for container ships that damages the health of millions of people in Los Angeles to help make Globalization more cost effective. If Globalization is so inevitable why do they do these things, it seems to me that Globalization is the result of deliberate government policy and does result in greater profits for the rich. This needs more discussion and its own post. But although there are elements of Globalization that are real, technology has changed, I think that Globalization as we know it is more or less a government fraud to reduce the middle class and destroy the worker.

Good point that globalization doesn't necessarily imply free markets. But free markets do inherently lead to globalization, so that component has to be acknowledged. And, it's not just technology but available skilled-enough labor markets propelling globalization (and benefiting from it). In fact I think protectionist/mercantilist policies have inhibited the natural trend toward more globalization. This tension between mercantilism and free markets (inherently global) has been going on for centuries, as described by Adam Smith in Wealth of Nations.

On the question of fraud: If globalization is a fraud, then you can argue that protectionism is a different sort of fraud whereby politicians pander to different constituent groups (including corporations) who directly benefit by a certain type of protection to the detriment to those who pay the higher prices and limited choices that result. Likewise, you could argue that free markets more generally are a fraud since they are can be corrupted and lead to crony capitalism. So there's fraud everywhere you look. The question then becomes what sort of system provides the checks and balances to keep the fraud under control.

Note: none of the above is meant to imply that protectionism is always bad and free markets are always good.

I probably agree with everything you say here, nor am I particularly arguing against global markets (and of course no one would care if I did). I think that the American people have been sold a deliberately false version of what Globalization is, to help them accept it, even though it is not in their interest. I might be wrong, but that is the distinct impression I get. But in a more narrow area of Visual Effects, what we are seeing is not at all ambiguous, the industry in America was devastated by these subsidies and tax advantages and our government did nothing (and it is in their court so to speak, there is very little an individual citizen can do beyond organize, or maybe lie down on the freeway and become a martyr). But you can organize to get votes and contact your representatives to contact the state dept and I hope they will. By thw way, I should use "mercantilism:" in quotes, or lowercase, or something. The behavior I am complaining about is not really mercantilism because mercantilism had a number of different goals. However some of the means that Mercantilism used are being used today and that is probably a safer thing to say, than to say it is "Mercantilist" as that is defined by Economic Historians.

About Me

I am a pioneer of computer animation and the computer generation of visual effects, starting from about 1976 forward. I have run my own studio, invented many production methodologies or pioneered them, and generally have been involved in the creation of entertainment uses of 3D. My interests are far broader than these, however, and I have a love/hate relationship with the field I helped to invent.